The SRA has decided not to impose a one-off levy on solicitors to pay for the rising cost of intervening in failed firms, but wants the multimillion-pound bill to fall on the rapidly diminishing compensation fund instead.
The fund is expected to fall from £67m at the end of March to £45m by the end of October, and the regulator has advised that the fees set this year to cover the cost of the fund in 2014 will reflect these increased costs.
The regulator faces an estimated £7m overspend, which it forecasts could rise as high as £15m on a ‘worst-case scenario’, resulting from high-profile firm closures and the prospect of more interventions this year.
It may have to intervene in about 50 more firms that cannot find a buyer but that have client files open.
In a paper prepared ahead of the SRA board meeting tomorrow, executive director Richard Collins said the increased costs of interventions cannot be accommodated in the current budget due to a number of other pressures.
He said: ‘Calling on group reserves is a highly undesirable and calling on those we regulate is also undesirable in the current economic climate. Meeting the costs via the compensation fund will offset these risks.
‘The compensation fund is of a sufficient size to deal with unpredictable or one-off events, such as an intervention. For 2013, the compensation fund is large enough to absorb any costs over and above what is already in the operational budget.’
Collins stated that recharging interventions to the compensation fund would have a ‘minimal impact’ on the fees collected from the profession, with the fund able to absorb unpredictable costs better than the operational budget.
‘It will ensure the SRA is able to intervene where necessary in the public interest, reducing the risk of budget constraints influencing our ability to exercise our regulatory powers.’
In its board report, the SRA said the ‘long tail’ of a slow economy was contributing to significant market correction which some firms have not planned for. This could lead to the increased risk of misuse of client money by firms in financial trouble.
It was the failure of bigger firms at the start of 2013, Cobbetts, Atteys and Blakemores (pictured), that increased the SRA’s exposure to exceptional intervention costs.
This year, there have been 12 interventions, of which eight required the services of external agent Capita.
The total budget for this year was £1.285m for intervention agents and £1.6m for archiving of closed files. In the best-case scenario these costs are likely to end up as £3.8m and £3.46m respectively.
The regulator said there was a 10% chance that a significant intervention, of a firm the size of Cobbetts, could be required this year.
The report added: ‘If we look at the potential high-end intervention costs for 2013, or even the levels of certainty around the best view it is difficult to see how any organisation could sensibly budget for such costs within a normal "administration" budget.
‘Put simply, it would have been fanciful to seek a budget for the SRA for 2013 some £6m higher than it is because there is a 10% chance that a significant intervention will be required. We are moving into a position where now and for some time in the future, intervention costs will be unusually unpredictable and lumpy.’
The SRA board will agree on a six-week consultation on the payment of intervention costs when it meets in Birmingham tomorrow.